Controller: IOUs signal Calif fiscal mismanagement

SACRAMENTO, Calif. — Thousands of Californians will be hurt and it will cost millions if the state is forced to hand out IOUs instead of payments next week, the state controller said Friday. The IOUs could come as soon as next Thursday, yet lawmakers remained no closer to a budget compromise.

State Controller John Chiang (CHUNG) said Gov. Arnold Schwarzenegger and lawmakers need to come up with a complete solution to the state’s $24.3 billion deficit instead of making a political statement.

“Running the state off the cliff is no way to make a political point. I don’t want shock and awe. I want permanent solutions,” Chiang said.

Democrats this week proposed to cut and delay billions in spending to prevent the IOUs — without solving the whole shortfall. Republicans in the state Assembly voted for the package, but Senate Republicans rejected it and Schwarzenegger said he would veto it if it were approved.

Without a new budget, Chiang said he would have to start issuing IOUs next Thursday. Students expecting college grants, disabled people and low-income seniors may not get paid if that happens. Vendors that provide services to the state and counties that run social service programs could also miss out on payments, and taxpayers would owe interest on the IOUs, Chiang said.

Chiang, who acts as the state’s accountant, said issuing IOUs will send creditors a message that the state is not able to manage its finances and would likely invite further credit downgrades. Fitch Ratings this week downgraded the state’s general bond rating to “A-,” from “A.”

“You don’t want to say you can’t pay your bills,” Chiang said.

The new fiscal year starts July 1, meaning an impending cash crisis is just days away.

A Friday vote on a portion of the Democratic budget plan fell short of the necessary two-thirds support in the Assembly for the second time. And a vote on Democratic proposals to raise fees and accelerate revenues failed in the Senate.

Lawmakers were scheduled to meet again Sunday.

One Republican lawmaker proposed minimizing the effects of the cash crisis by allowing people who receive IOUs to use them as a credit toward taxes, fees and liens they owe the state. The bill by Assemblyman Joel Anderson, R-La Mesa, is before the Assembly’s banking committee.

The IOUs offer only a temporary fix to the state’s cash flow. Even if California issues the warrants, the state will be $600 million in the red in September, according to the controller’s office.

The IOUs, also known as registered warrants, will look similar to a check but have the words “registered” printed on the front. If the state has enough cash in October, the state treasurer will pay the IOUs with interest.

Some banks might cash IOUs early, depending on the interest rate the state offers, said Beth Mills, a spokeswoman for the California Bankers Association. A state board is not expected to announce the interest rate until July 2.

Last summer, as budget negotiations held up payments, universities allowed students enroll in classes while waiting for the state to adopt a budget and provide money for college grants.

The last time the state issued IOUs was during a protracted budget fight during the summer of 1992. Some banks initially honored the registered warrants but then started to decline cashing them as the stalemate dragged on.

“It’s a very dangerous game of chicken, and we’re not playing it,” said Senate President Pro Tem Darrell Steinberg, D-Sacramento.